Answer:
$150.15
$92.31
Explanation:
Target stock price in year 5 = Earnings per share in year 5 x benchmark PE ratio
Earnings per share in year 5 = dividends per share in year 5/ pay-out ratio
Dividend in year 1 = $1.15 x 1.20 = $1.38
Dividend in year 2 = $ 1.15 x 1.20^2 = $1.66
Dividend in year 3 = $1.15 x 1.20^3 = $1.99
Dividend in year 4 = $1.15 x 1.20^4 = $2.38
Dividend in year 5 = $1.15 x 1.20^5 = $2.86
$2.86 / 0.4 = $7.15
$7.15 x 21 = $150.15
b. the stock price today can be found by finding the present value of the dividends
Present value can be found using a financial calculator
Earnings per share in year 5 = dividends per share in year 5/ pay-out ratio
Dividend in year 1 = $1.15 x 1.20 = $1.38
Dividend in year 2 = $ 1.15 x 1.20^2 = $1.66
Dividend in year 3 = $1.15 x 1.20^3 = $1.99
Dividend in year 4 = $1.15 x 1.20^4 = $2.38
Dividend in year 5 = $1.15 x 1.20^5 = $2.86
Stock price in year 5 = $150.15
i = 12%
Stock price (present value) = $92.31
To find the PV using a financial calculator:
1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.
2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.
3. Press compute
